Corporate Finance II Professor Matthew Spiegel

Overview Cases and lectures. Case groups of two. –Deadline is this Friday for the formation of groups! Case days. –One group will be randomly selected to conduct a 45 to 60 minute presentation. –Each group must turn in a four page write up of each case. Tables and graphs do not count. Syllabus on the web.

Cases Most will not be typical business school cases! Cases will ask you to examine a firm as it currently exists and to answer questions about it.

How Will You Know if You Made the Right Call? By waiting a few years to see what happened. –Such is life. Too many cases rely on hindsight. This is a luxury you do not have in real life. Here you are stuck making decisions based on arguments with the data at hand.

Then How Will We be Graded? Grades will depend on how well you defend your conclusions. Bad defense: It seemed to us a 3% growth in sales for five years was reasonable. –Ad hoc. Why not assume 2% or 4%? Better defense: Sales growth has been 3% for the past several years so we are projecting that forward for the next five years. –At least this is based on something. But why do you think the past growth rate is the appropriate one going forward? Much better defense: Sales growth has been 3% for the past several years. Furthermore, the firm’s market share has been fairly constant and unless that changes we should see a 3% growth rate into the future. As of today management has not presented a plan that would improve upon that. Thus we using that as our projection for the next five years. –Uses past results for the projection’s basis, but also looks forward asking if there might be any changes in the works.

Questions Every Presentation Should Answer What does the firm do? How has it performed relative to its peers? What is its current and future financial policy? Have their been any recent changes in its product mix. –Divisions purchased or sold. Does it plan to add or subtract product lines in the foreseeable future?

Lesson Specific Questions At least a week prior to each case’s discussion in class questions specific to that case will be posted on the web. –Foamex is currently in financial distress. How did this happen? What should management do? What should the bond holders do? How much is the debt worth?

Class Discussion Do the presenters a favor and question what they say! If the class has nothing to say I will assume they find the case presentation to be so abysmal that it is not even worth commenting on! Do yourself a favor and question what the presentation. –Class participation is part of your grade!

Discussion Goals The goal of each discussion is to analyze the elements that go into making a business decision. –What data do you have? –What do you need to just assume in order to go forward? –What kind of additional analysis might you do if you had the resources and time?

Class Notation The value of a firm’s equity: E. The value of a firm’s debt: D. A firm’s marginal tax rate: T C. Risk free rate: r f. Expected return on the market: r m.

Information Sources Hoover’s – Business Browser – Yahoo! – WRDS – SEC Free Edger – Bloomberg –There is a Bloomberg terminal in a breakout room on level A.

Hoover’s Financial statement summaries. –Warning: not as good as going to the 10-k’s. Financial and accounting ratios. Comparisons with competitors.

Business Browser Financial statements. –As reported or standardized. –Use as reported! Standardize them yourself! A few analyst reports. –In the real world a much better source is Thompson Financial. Create peer lists. Industries by SIC code. Need to set up your own account.

Yahoo! Click on finance and then enter the ticker symbol of the firm you are interested in. Real time statistics. Historical prices.

WRDS CRSP stock price database. –Daily stock returns through –Extremely useful for testing theories you hope to develop. –Web based, easy to use. –Fast and easy source for data on E, r m, and r f. Compustat database –Accounting data going back several decades. Enter the firm. Click on the accounting items you want. Instant delivery of the spreadsheet data you want! Class account. –Login name: xxxxx. Note all small letters! –Password: xxxxxxx. Who can argue with that?

SEC Free Edger The place to get the company’s current and past financial filings.

Bloomberg Essential for getting bond data. –Bond price quotes. Good for bonds that are not currently going up or down in price by large amounts. Quotes are likely to be stale for bonds seeing rapid price changes. –Bond terms (covenants). Useful for stock data as well, but there are other sources. Extremely user hostile! –Learning to use a Bloomberg terminal is a painful but, alas, essential experience. It is the standard data source on Wall Street.